The Labor Constraint

The Labor Constraint

A few years ago I managed an NGO that served 20,000 subsistence farmers in Mali. I was surprised when I first arrived to find many of our farmers planting less than half their land. They might have 10 hectares but were planting only 2 or 3. The reason? Not enough labor to get it done in the two-week window after the seasonal rains began. Oddly, economic growth in a country with 40% unemployment was limited due to a shortage of labor.

The U.S. is facing a similar constraint as the nearby chart from NumberNomics attests. In October 2017, the number of job openings and the number of unemployed reached parity. That is, there was one open job for each person looking for work. Since then, the numbers of unemployed have continued to decline while the open positions continue to increase. Today, there are 1.25 open positions for every person seeking work.

How does this affect GDP growth?

From a macro perspective a growing economy requires capital, technological advances and labor. The first two can substitute for labor over time. The U.S. has capital and technology in abundance but it takes time to create and program an AI workforce despite all the hyperbolic predictions we hear every week.

From a micro economic perspective, businesses are seeking to expand. They are operating in the most attractive market environment in decades and they want to productively invest some portion of the $1 trillion that was repatriated in response to the tax reform act of 2017.

Suppose we want to open a new branch office in Phoenix. We need to hire nine new staff to complement the manager we’re moving from Denver, but we can only find seven. Worse, only five of those are remotely qualified to do the work. Can we run a branch effectively with half a team? Will customer satisfaction drop like a stone? Is it too risky?

Better put off that Phoenix expansion to next year.

One might ask, with the excess of job opportunities, why isn’t the unemployment rate zero? The answer is twofold.

First, there is a certain friction in taking a new job. For example, one might need to move to another state or take on a longer commute. Mobility of Americans dropped significantly during the failed recovery from the financial crisis of 2008. People stayed put in part because their houses were underwater and in part because the prospects of finding better employment elsewhere were modest. In 2010, despite an unemployment rate of 10% and the home price index near its bottom, 10% of American households moved across state lines according to the World Bank. This flexibility is a pretty unique attribute of the U.S. labor market.

Second, there might be a mismatch between the skills of the unemployed and those open jobs. According to the National Federation of Independent Business’s (NFIB) Chief Economist, William Dunkelberg, finding qualified workers remains the top issue for many businesses.

This is no surprise.

Any basic demographic analysis predicted the decline of the “productive cohort” of 30 – 55 year olds some years ago. (See Preserving our typical economic growth rate of 3%, meant adding 1.5 million qualified workers per year for 20 years.

There are two possible solutions to the shortage – one short-term and one very long-term.

Our excessively literate but largely innumerate esteemed representatives in Washington seem to have limited capacity to deal with the short-term solution. Immigration is the hot political football with each party preferring the advantage of “having an election issue” to working on a solution. So, unfortunately, the DACA people will remain hostages of the democrats for now and the republicans will limit the number of H1B visa-holders viewing them as “competitors” to American workers. Meanwhile, they argue about a wall?

The longer-term solution is to improve educational outcomes. Today, only 85% of young people graduate from high school. The quality of those graduates is in doubt. A department of education study found that 19% of high school graduates are functionally illiterate. Add that to the 15% that did not graduate, and it is no wonder that there are 32 million Americans that cannot read and another 21% that read below a fifth grade level.

We better add reading and writing to the training manual for our new Phoenix office.

Virtually every study of education at the primary and secondary levels cites teacher quality as the most important factor in student success. Yet we have a system managed by people that decry any accountability for teachers. A study in California in 2014, found that over the prior 10 years, only 19 tenured teachers were terminated for poor performance out of a total labor pool of 266,000!

In many places, the unions that control the systems steadfastly resist any effort at innovation that might improve student outcomes. Witness the battle over public charter schools or the local resistance to pay-for-performance initiatives. Those same unions have a disproportionate influence over the politicians that could force innovation so it is unlikely that any material change to educational outcomes is forthcoming.

Then, there is, of course, a third solution – that aforementioned Artificial Intelligence.

In sum, our labor shortage will not abate anytime soon. Given that constraint, it could be that 1 – 2% GDP growth is the best we can do.